If you want to know which way Taiwan’s economy is headed, consider this: At a time when most Asian countries are trying to slow the flow of capital into their countries, Taipei is trying to stop it flowing out. Talk about a cure that’s worse than the disease.

New controls limit new mutual funds to NT$10 billion ($302 million) in offshore investing. The measure isn’t quite a formal rule — it’s a “guideline” hammered out in late May by the central bank and the Securities Investment Trust and Consulting Association, a mutual fund trade group. While the deal doesn’t appear to be legally binding, the bank reportedly will use moral suasion to enforce it, in part by slowing down new mutual fund applications for funds that plan to violate the cap.

The Central Bank of China (Taiwan) has been growing increasingly worried about the weakening of the Taiwan dollar, which has been on a downward trajectory for the better part of the past year. Other adventures in currency manipulation have included a recent bout of unanticipated open-market operations designed to spike exchange and interest rates as a way to “punish” those with the temerity to sell short the Taiwan dollar.

Now, at least, the central bank is inching closer to the true reason for the Taiwan dollar’s softness — investment outflows. Net outflows hit nearly $11 billion for the first quarter of this year. Taiwan’s net investment flows haven’t been in the black since the second quarter of 2005. Even in a region awash with liquidity and in the midst of a global bull market, investors just don’t want to put their money in Taiwan.

Structural factors are to blame. One culprit, ironically enough, is the restriction on corporate investment in the mainland. Taiwanese companies are allowed to invest only an average of 40% of their value (the limit varies by industry) there. But because such investment is so lucrative, Taiwanese companies and entrepreneurs are increasingly opting to work around the law. They can do this by setting up shop in less restrictive countries, leaving Taiwanese investors with fewer companies at home in which to put their money.

On a related note, Taiwanese economic policy hasn’t kept up with the times. There is still a strong regulatory and policy bias in favor of manufacturing over services, despite the fact that Taiwan is at the stage of development where it should be expanding its service sector. Spaghetti-like corporate structures and endemic insider trading also discourage investors from diving too deeply into Taiwanese equities. Bad policies and their outcomes — from a chaotic banking sector to hurdles for companies that want to on-shore research and development while offshoring manufacturing — leave many Taiwanese companies and their stocks underperforming.

To top it all off, there’s political gridlock when it comes to addressing many of these problems. Fighting between the two main political parties has kept the focus off improving the economic climate. It’s hard to think of any major economic policy overhaul in the past seven years.

In imposing limits on offshore investment, the central bank is asking Taiwanese investors to take one for the team by keeping more of their money at home despite the poor returns. But the bank is missing the point. The weak exchange rate is a symptom — not the disease — and capital controls will only make it worse.

One of the hottest exports from Japan these days is not video games or eco-friendly cars. It is engineers.

As the once-vaunted Japanese electronics industry has downsized to survive global competition, it has inadvertently set off a brain drain. Thousands of Japanese engineers and other industry professionals have gone to Taiwan, South Korea and China to seek work at aggressive, fast-growing companies on the prowl for access to Japanese technological skills.

But the recent outflow of job-seekers is a sign of just how much Japan has changed after a decade of increased competition, corporate belt-tightening and the end of lifetime job guarantees. This harsher world has led Japan’s famously conservative salarymen to become more aggressive in their job choices and to view their careers as something for their own benefit and not simply as service to their companies, employment experts said…

The government of Taiwan says at least 2,500 Japanese have moved there in recent years to work mostly in technology-related manufacturing industries…

The migrants are finding themselves welcomed with open arms and generous pay. Some countries, like Taiwan, are aggressively courting Japanese professionals. Companies in Taiwan are eager to gain access to Japan’s leading technology in areas like electronics, both to catch up with Japanese front runners like Sony and to stay ahead of fast-gaining Chinese rivals. The Taiwan government says it has spent $20 million a year since 2003 to recruit foreign engineers, including Japanese in such important industries as semiconductors and flat-panel displays…

The largest number of offers are from companies in booming China, she said, but those with the most coveted skills tended to get hired by companies in Taiwan, which are rushing to close the technological gap with Japan…

Hiroshi Itabashi was an engineer with more than 20 years experience at a midsize Japanese television maker when he got a phone call out of the blue in 1999 from Delta Electronics, a fast-growing Taiwanese electronic components company…

“They gave me this exciting opportunity to build a whole new business from scratch,” said Itabashi, 56, who asked that his former Japanese employer not be identified. “This is something you can’t do in Japan. These days, Japanese companies always seem to be closing down operations, not starting new ones.”

This should serve as a warning to all foreign investors looking to enter China. Compared to the rest of the world, China actually has a relatively comprehensive set of IPR regulations. The problem right now lies in their enforcement. Beijing claims that it’s making an effort to crack down on piracy, which is an integral part of almost every industry imaginable within China, from DVDs and LV handbags to SMART cars and prescriptions drugs.

For years, Beijing has placed the blame of China’s lack of IPR enforcement upon the local governments, which it claims are ignoring the policies implemented by the central government. This may be true to some extent but let’s not forget what we’re dealing with here. As a one-party state, the CCP has complete control of the system. The government is involved in almost every single aspect of the economy. So how credible is the CCP when it claims that it’s already doing its best? Unless…PIRACY IS GOOD.

China’s aspiration for globally recognized national champions and its ambition to establish itself as a technological superpower will be realized at the expense of foreign investors. Unlike other previous developing countries, which all had serious IPR problems but eventually caught up to Western standards brought upon by foreign pressure, China’s has little motivation to follow suite since it has more leverage than its trading partners. Although foreign investors understand the high level of risk involved relating to IPR infringement when they invest in China, with a potential consumer market of 1.3 billion, the CCP is confident that foreign investors will continue to flock to China with their new technologies. Currently, within most industries, foreign investors are required to pair up with a domestic partner. In time, the domestic partner will terminate the partnership and compete with its former foreign partner using a “similar” product. When the two parties go to court and when push comes to shove, as with everything else in China, those with the “connections” will prevail, leaving foreign investors completely vulnerable to such business risks.

As of now, the CCP will only do what’s best for its domestic industries, which is to turn a blind eye to piracy and allow local Chinese firms to profit and “innovate” at the expense of foreign investors. In the future, when Chinese firms become serious about R&D, that’s when the CCP will get serious about IPR protection as well.

Like bad Chinese food, the Beijing-Taipei flap over the 2008 Olympics torch relay leaves a funky, disappointing aftertaste. It is not what one should expect in connection with an event that celebrates human capability, spirited competition, collective pride and unity.

Ironically, the torch relay — advertised by China as the most inclusive in history — has ignited a firestorm of divisiveness more than a year before it is scheduled to light up the Olympics’ opening ceremony. Beijing wishes to run the torch through Taiwan as a continuation of its trek across parts of China, thus underscoring its claim to the island. Taipei seeks a route through third countries.

Whether this issue is resolved or not, the contentiousness between China and Taiwan — after nearly 60 years — has grown tiresome. No wonder some people throw their hands into the air and exclaim, “Why don’t they simply duke it out, and let the winner take all of China?”

Chinese leaders certainly appear prepared — and at times eager — for confrontation. The threat of military force lingers just behind their lips every time Taiwanese officials toy with notions of independence. But surely Beijing’s communist rulers know that an invasion of the island would fail, even if they managed to obliterate Taiwan. Most damaging, such action would deprive them of their only significant claim to legitimacy: Chinese economic strength.

If, because of war, China lost the ability to bring large numbers of have-nots to a higher standard of living each year, the Chinese people would stand up again — this time, with their pitchforks aimed directly at the leadership that supposedly liberated them in 1949. The Communist Party would die overnight.

Bear in mind that none of this discussion has considered the impact of China-Taiwan conflict and disruption on the regional and global economies. Clearly, this is not a civil spat that should be allowed to burn itself out.

So, what are the other options?

The tedious status quo, for one. Another would be for Taiwan to follow in the footsteps of Hong Kong and Macau, and end once and for all the artificial separation of China. Beijing would love that decision; indeed, it has dangled many incentives before Taipei to induce it to end the rift. Looking to the Hong Kong example, with a 50-year transitional agreement guaranteeing the district’s way of life, many analysts see opportunities for Taiwan. In fact, Taipei has the leverage to demand much more from such an arrangement.

It has little reason to take that route, though. After all, Taiwan occupies the higher ground in terms of its democratic government and free-market economy. China is still traveling down a sometimes herky-jerky road to reform. The controlling impulses of its moribund ideology hamper political development. Democratic practices are evident only at the village level. In addition, excessive state influence lingers over China’s economy, despite its power and numerous free-market elements.

Further, I do not buy the idea embraced by some that Taiwan might more effectively work to change China from the inside than it can in its current position.

I would prefer to see the opposite, that is, for China to join Taiwan, and have every expectation that reconciliation is possible later in this century. After all, Beijing and Taipei grow more interdependent with each passing year. Pressures for wider reform within China will not pause. Eventually, a “Big Taiwan” will rise on the mainland. At that point, when the two systems mirror one another, they will merge.

In the meantime, the key will be for sensible heads to prevail, particularly during moments of tension such as the spat over the Olympics. China and Taiwan must, at all costs, avoid sacrificing their vast mutual interests on the altar of their aging dispute.

Reunification is an option, but Mainland China must provide Taiwan sufficient motivations to do so. At its current rate of progress, it will be decades before “mirror images” emerge across the strait, especially if the CCP intends to hold on to power.

A little piece of England came to China this week. On Mar. 27, the classic British brand MG Rover began production in Nanjing, in Jiangsu Province, with 1.8-liter and 2.5-liter MG7 sedans and a 1.8-liter MG TF roadster rolling off a Chinese factory line. Next up will be other MG nameplates with engine sizes ranging from 1.1 to 1.6 liters, says Nanjing Automobile Group, the new owner of the once-iconic British brand. Unlike other Chinese auto companies that have either partnered with foreign auto companies or developed their own brands, Nanjing Auto is taking “a third path” aimed at creating an internationally competitive auto player, said Chairman Wang Haoliang on Mar. 27, according to the China Daily. The company has ambitious plans to spend $2 billion, which include the opening of a factory in Ardmore, Okla., next year in a bid to crack the world’s biggest auto market…

And the Chinese car companies are not content to stay at home. Hefei (Anhui Province)-based Chery, which produces the popular minicar the QQ on the mainland, recently signed a deal with DaimlerChrysler that will see it produce Dodge-brand vehicles for the U.S. and Western Europe markets. Shenyang-based Brilliance Automotive, which has a joint venture producing BMWs with the German company in northeastern China, showed three new models at the Geneva Auto Show this month. Those included a sporty sedan called the BS6, a BS4 compact, and a two-door BS3 coupe, all of which it aims to sell in Europe…

Despite those inroads abroad, cracking developed Western markets certainly won’t be easy. One huge challenge will be breaking into distribution channels and convincing overseas customers to trust Chinese autos. Chinese car companies have an often-deserved reputation for being more concerned with cost cutting than building high-quality, innovative vehicles. “The weak foundation of the Chinese car industry still makes it difficult for China to produce a car of decent quality and safety level,” cautions Beijing-based auto analyst Jia Xinguang.

Indeed, even succeeding at home is a challenge in the highly competitive, cutthroat Chinese auto market. So Nanjing Auto has asked Beijing for loans and subsidies totaling close to $400 million to fund its big plans to sell the Rover in China and overseas. Whether or not Beijing provides that major handout, though, MG Rovers will soon be tooling the roads of China.

Sustainable competitive advantage. U.S. Consumers would be attracted by the relatively cheap prices of Chinese automobiles, but what else can these cars offer to differentiate themselves from other established brands?

China announced a new round of charter flights with Taiwan on Monday in an effort to temporarily skirt a ban on direct transport links between the historical rivals.

Eleven Chinese and Taiwanese carriers will fly 42 round trips through April 8 to coincide with the traditional grave sweeping festival, the official Xinhua News Agency said.

Flights will service Taiwan’s capital Taipei and southern metropolis of Kaohsiung, and Beijing, Shanghai, Guangzhou, and Xiamen on the Chinese side. The flights were agreed to last year during negotiations between private aviation associations, required because China refuses to recognize Taiwan’s government or deal with it directly.

Taiwan has banned direct scheduled commercial flights since the sides split amid civil war in 1949, but direct charter flights have been gradually expanding to cater to the needs of Taiwanese residents of the mainland, although they remain confined to major holidays – including last month’s Lunar New Year. The charters are off-limits to non-Taiwanese.

Taiwan’s government is considering an expansion of charters to allow Chinese tourists to fly directly to the island, instead of by way of third countries as they are required to do so now.

Under pressure from the domestic tourist industry, Taiwan has been looking for way to expand the number of Chinese tourists allowed to visit the island each year to 365,000, almost 10 times the current number.

Contrary to the article, the ban on direct flights across the Taiwan Strait is actually a two-way ban by both Taiwan and China. Nowadays, China’s ban on direct flights serves no practical purpose to its security. On the other hand, with China’s growing military strength and its increasing threat to Taiwan, the island has valid reasons to be concerned of its national security if it were to lift its ban on direct flights.

However, the lack of direct flights is taking its toll on Taiwan’s economy by burdening Taiwanese businesses with unnecessary costs, and forcing them to forgo potential opportunities. For example, Cathay Pacific derives roughly 10-20% of its revenues from the Taipei-Hong Kong route, which predominantly serves Taiwanese passengers and cargo flying to and from China in the absence of direct flights. If the bans from both sides were to be lifted, Cathay would no longer hold the competitive advantage and would be forced to give up market share to Taiwan-based airlines such as China Airlines and Eva Airways.

Realistically, even if Taiwan were to lift its ban, there are still many obstacles that must be resolved before direct flights can commence across the Taiwan Strait. Aside from the whole national security issue, the two sides also have to consider how direct flights would be perceived by the international community. For example, would cross strait direct flights be “international” or “domestic” flights? Unsurprisingly, China insists on labeling them as domestic, whereas Taiwan considers them international.

My proposal: Flights going to Taiwan would leave from the domestic terminals of Chinese airports, but arrive at the the international terminal of the Taoyuan International Airport. After their arrival, the passengers would still be required to go through immigration and customs just like any other international flights. Problem solved.

Of course, nothing is ever that simple when it comes to China-Taiwan relations. Everything has a hidden meaning, and almost all the “unofficial” negotiations revolve around minimizing the use of words, images, and symbols that have the potential of being used for propaganda purposes by either side. For example, judging from the picture directly above, which depicts the old exterior design of China Airlines’ aircrafts, would China have allowed the upcoming charter flights across the Taiwan Strait if this design was still in use?

Beginning Jan. 1, China’s companies have been booking their profits under a new accounting regime, based on international accounting standards. It’s estimated some 20,000 staffers from U.S. accounting firms are there, boots on the ground, helping China’s companies scrub their books to bring them up to speed.

But what does this mean for investors, and what can they expect to see?

In an admission rare for China’s historically tight-lipped bureaucrats, Zheng Shaodong, assistant minister of public security, told the government press that China does not have sufficient resources to deal with the mounting number of economic crimes. “Many economic crimes are either not detected or unable to be investigated, and this represents a threat to social harmony,” he said.

Fraud reaches into the lifeblood of China’s economy, its state-run banking sector. The China Banking Regulatory Commission said in 2005 that it had punished 799 staff members of the country’s four biggest state banks after finding they were involved in illegal or unauthorized loans totaling $73 billion, according to government reports.

Another trouble spot is that financial disclosures are so poor, investors can never see trouble coming. And China still puts a stranglehold on post-mortem details about these flame-outs, leaving investors in the dark.

When Euro-Asia Agricultural, a Chinese orchid business, went belly up in 2004, the government would only disclose in official press reports that the company had inflated its revenues. It’s still unclear how exactly the company padded its revenues, since China’s financial authorities have not released further details.

Similarly, within months of China Life Insurance’s huge $3.5 billion initial public offering in 2004, state auditors found $652 million worth of irregularities, according to official press reports. Government auditors will only say the irregularities involved “inappropriate competitive problems” and “inappropriate” use of premium funds, including loans and investments. It also found that millions of yuan had been placed into “little treasuries,” which are off-book accounts used to distribute bonuses…

Moreover, loopholes are already being written into the new disclosure statutes. China’s state-owned companies have been exempted from having to disclose related-party deals, endemic in China. Related-party deals usually equate to shareholder capital wasted on insider cronyism for such items as company loans, real estate or consulting deals.

Donald Straszheim, former chief economist at Merrill Lynch and now vice chairman of Roth Capital Partners, recently noted in a report that investors will be effectively shipping money to China’s government without any disclosure on the deals. That might be reason enough to stay away. Both Shanghai and Shenzhen “were launched 15 years ago not as a place where sources of capital and uses of capital could meet, but rather as a way for the state to attract outside investors, thereby increasing the value of the existing government stake in those companies,” Straszheim says. Besides related-party deals, Chinese corporations are still struggling to account for basic line items. “In terms of profits, returns and other indicators, 70% of listed companies on the mainland do not meet international standards,” Cheng Siwei, vice-chairman of the National People’s Congress, warned investors at a Financial Times China-Middle East summit in Dubai earlier this year.

China’s “socialism with Chinese characteristics” has fared well over the past 29 years, but what will become of China’s predominantly state-led capitalism in the years to come without inspired investor confidence in the accounting profession?

China’s government said it approved plans by IntelCorp. to build an advanced semiconductor plant in the country, an project that — if it proceeds — would mark a major step for China’s efforts to attract high-technology investment.

An Intel fab would be a triumph for China in its decades-long campaign to develop a semiconductor industry. The government hopes that foreign investment will promote the development of domestic chip companies, enabling China to eventually wean itself from expensive imported technology…

The U.S. Department of Commerce sets complex restrictions governing exports to China of advanced equipment for making chips. Some of the rules require several government agencies to review and approve exports of manufacturing gear that can make chips with dimensions of 180 nanometers or less. An Intel factory with 90-nanometer circuitry would be two generations of production technology beyond those limits…

For Intel, whose chips are mainly used in personal computers, a fab in China would put it closer to one of the most important markets for its products. China is now the world’s second-biggest market for personal computers after the U.S. by unit sales, as well as the place where many PCs are manufactured for markets outside China…

Out of all seriousness, I think there’s a very simple solution to Intel’s problems described above. Build the plant in Taiwan.

Most of Intel’s chips are used for personal computers, which are for the most part manufactured and assembled in China. However, Intel must also be aware that most of its customers within China who manufacture and assemble these personal computers are foreign owned, namely by Taiwanese companies, such as Foxconn, Quanta, Wistron, Compal, and others. Typically, these Taiwanese companies rely on their subsidiaries in China to provide the necessary labor while key components are manufactured in Taiwan and exported to China. To reduce costs, Intel can easily make arrangements with these Taiwanese companies to have its chips shipped to China along with those key components mentioned above.

Most importantly, having the plant in Taiwan would not be viewed by politicians as a threat to the United States since the two countries are implicit allies when it comes to potential conflicts with China. Furthermore, Intel would not have to run the risk of aiding in the development of potential competitors since Taiwan already has champion chip makers, such as TSMC and UMC. Lastly, Taiwan’s better structured and enforced IPR would better protect Intel’s investments and guarantee its longterm success.

When Deng Xiaoping came to power in the late 1970s, the tallest building in China was the 18-floor Beijing Hotel. Today the Jingguang building soars to 53 storeys and by 2008 will be eclipsed by the 330-metre China World Trade Centre.

China might still be low-rise but for Deng’s determination to open the country after decades of isolation, and to try to end grinding poverty by forcing through market-style economic reforms.

But despite his role in reshaping the nation, the memorials for Deng today, the tenth anniversary of his death, are likely to be as low-key as the man himself…

His daughter says that his most difficult task was to overhaul the system of lifelong tenure for the elite. “He ended power-for-life for leaders, replacing government by man with government by law. I’m very proud to say that my father was the first leader in Chinese history who retired while he was still in power.”

I can’t help but think he was simply doing what he had to do under the circumstances at the time. No matter who came into power after Mao’s death, the results would have been relatively the same. China prior to its market reforms in 1978 was on the verge of an economic and social breakdown. China needed to open up its markets to allow for the injection of foreign investments to revitalize its economy. The way I see it, Deng only had two options: 1) retain the old communist system, maintain China’s economic isolation, and thus run the risk of widespread civil unrest, which most likely would have led to the downfall of the CCP regime OR 2) convince the remaining party elders that “socialism with Chinese characteristics” was more socialist than capitalist, which would allow China to embrace capitalism as well as maintain the CCP’s legitimacy as a “communist” government. The decisions Deng faced were not rocket science, but simple common sense.